New tax splits energy giants

A split is emerging between Australia’s oil and gas heavyweights over the urgency of reforming the Rudd government’s resources super profits tax (RSPT).

Companies with heavy onshore exposure, including Shell,
Santos
and
Origin Energy
, have expressed alarm at the impact of the proposed tax on their pending investments in the fledgling coal-seam gas sector.

But they are getting little sympathy from energy giants that are already taxed on their offshore operations under the petroleum resource rent tax (PRRT).

Both sides lined up yesterday to hear Resources Minister
Martin Ferguson
pronounce the industry had “largely accepted" the need to pay more tax.

“Up until now there has never been a requirement to have a royalty regime in place for that [coal-seam gas] industry," he told the Australian Petroleum Production and Exploration Association energy industry conference in Brisbane. “The industry largely accepts the need to pay more tax."

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She said any tax had to take into consideration a company’s cost base and the risks it went through to bring a project on-stream.

The PRRT is “working pretty well", so “why mess around with it?" she asked.

In contrast to the RSPT, the PRRT does not affect a project until it generates close to a 20 per cent internal rate of return, according to calculations by RBS Morgans. The RSPT starts eating into project valuations at anything above 10 to 11 per cent returns and imposes a much higher tax burden than the PRRT.

A multibillion-dollar coal seam gas-based LNG project that Shell and partner PetroChina are planning in Queensland would be subject to the 40 per cent RSPT, which under the government’s current proposal would apply to returns above the long-term bond rate.

Santos
and
Origin Energy
, which are involved in separate LNG projects in Queensland, have already warned their final investment decisions on their projects, due this year, risk being delayed because of the tax.

Chevron, BP and ExxonMobil said it was time the onshore industry faced a similar tax regime.

“I agree with Roy Krzywosinski from Chevron, who said it is valid for governments to engage in striking the right balance in tax take between the resource projects and the communities in which you operate," said David Eyton, group vice-president for research and technology at BP.

“What we want is something that is pretty stable so that we can make investments of confidence."

The chairman of ExxonMobil Australia, John Dashwood, said he would not campaign against the tax. “We are not going to be visible and putting huge messages out there about this tax because we do not have the immediate impact and wish to do that," he said.

Chevron, operator of the Gorgon and Wheatstone LNG projects, was also less vocal in its criticism as its signature gas projects are already classified under the PRRT.

“We welcome the government’s decision to retain unchanged, the PRRT regime for existing offshore oil and gas projects including Gorgon, Wheatstone and the Browse development," said Mr Krzywosinski, head of Chevron Australia.

But he still underlined the need for fiscal stability through the 40-year lifespan of some projects. “Having that fiscal stability is paramount because you don’t want moving goalposts," he said.

Chevron will have to further study the RSPT before deciding whether to opt into it from the PRRT, Mr Krzywosinski said.

But for junior explorers like Buru Energy, exploring in the onshore Canning Basin in Western Australia, the government’s proposals require urgent revision and deep consultation with the industry.

The concept that a “super profit" is the return on a risk-free government bond is “quite simply appalling", said the executive director of Buru Energy and chairman of oil industry association APPEA,
Eric Streitberg
.

He said Australia’s onshore oil and gas industry is particularly vulnerable to the new tax, describing the uncertainty caused by the proposal as “highly destabilising".

Mr Streitberg also attacked the government’s proposal that it pay 40 per cent of the losses of failed projects in return for a bigger share of the rewards.

“We have never called on governments to underwrite our failures, nor do we think it appropriate for taxpayers to have to bail out dud projects," he said.